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April 1, 2002

The Mid-Cap Maven

By Kathryn M. Welling

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Eric McKissack is a busy guy. Intense, too. The co-CIO, along with founder John Rogers, of Chicago-based Ariel Capital Management, is a mid-cap maven who not only runs the Ariel Appreciation Fund, but co-manages the Pace Small/Medium Value Equity Fund, and also calls the investment shots for several institutional funds.

Yet he's never too busy to do more investment homework, reworking research skills first picked up at MIT and Berkley and honed at First Chicago, but still being constantly refined even 15 years into his association with Ariel. Eric graciously shared his current insights when we called recently.


Let's be clear, Eric. You didn't exactly discover mid-caps yesterday.

No, I've been at Ariel since 1986 and I've been managing our mid-cap effort from its inception in December 1989. So in fact, I'm a "grizzled veteran" in the mid-cap space-which wasn't even considered an investment category back then.

Of course, what's considered a mid-cap these days is a mite larger than it was -

All these definitions have evolved with the kind of overall market growth that we saw in the '90s. Initially we defined mid-cap as principally $1-$5 billion. Now we've moved that up to $10 billion. We don't automatically sell stocks that fall outside of that range but our average market cap is $4.5 billion, pretty much smack-dab in the middle. You may see a handful of companies with caps north of $10 billion in the portfolio, but you won't see any mega-caps; none of the top-quintile companies, the big-caps north of $40 billion.

Your timing in starting the fund was pretty good, but then you-and the mid-caps-hit a rough patch in the mid-'90s.

We didn't exactly shoot the lights out in the early '90s, but the mid-'90s were especially tough for us. It was a combination of things. One, certainly, was that the first signs emerged of growth and techs fueling the market in the '95 time period and our style of value wasn't particularly well-received. Secondly, however, we also felt that there were stocks in the portfolio that maybe we were a little bit slow to pull the trigger on. There were some things that we needed to do better. We continue to this day to try to get better at what we do. At the end of the day, we kicked a few stocks out of the portfolio. We expanded our use of intrinsic value analysis as a way to determine opportunities in the marketplace. Then too, the market has obviously changed a little bit. So we've seen pretty good performance ever since '96. Certainly, '99 was tough for us, as it was almost all value investors. But that period, in our estimation, came and went pretty fast in the scheme of the way long-term investors look at the market.

Are there really any long-term investors left?

Well, maybe we're alone, the last player standing in that arena, but we certainly think of ourselves as long-term investors. Our portfolio statistics bear that out.

Your average holding period is -

Four or five years. Our turnover is 25 percent annually.

And you see the market as amenable to your style here?